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Romancing the Stone

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Diane Irvine,CEO and president, Blue Nile ...

A strategic blend of low overhead and first-rate product is proving a winning formula for Blue Nile. The online jewelry retailer, founded in 1999 by frustrated engagement-ring shopper Mark Vadon, has successfully traversed the e-commerce channel by combining its stalwart focus on its core product line—diamonds—and unwavering commitment to the online shopper with some of the most competitive prices around. In so doing, it has become one of the nation’s biggest sellers of diamond rings, second only to Tiffany & Co.

The company, which went public in 2004, has seen its revenue grow from $14 million in 1999 to $319 million in 2007. Net income in 2007 rose 34% to $17.5 million. Its success has come even as many independent and mall-based bricks-and-mortar jewelers have seen their profits erode and have been forced to close stores. In fact, Blue Nile’s rate of growth has even exceeded Tiffany’s. In 2007, the online company experienced a 26.9% increase in sales over the year prior. Tiffany grew 14.8% in the same period.

Blue Nile is headed up by Diane Irvine, 49, who serves as CEO and president. She was appointed chief executive in February 2008, when co-founder Mark Vadon assumed the role of executive chairman. Irvine, who joined Blue Nile its first year as CFO and then later became president, was Vadon’s key partner in growing and expanding the company.

“The key to our success is the customer proposition,” Irvine told Chain Store Age. “We sell the very highest-quality diamonds for 20% to 50% less than other jewelry stores.”

Irvine maintains that the Blue Nile business model is unrivaled in its strategic blend of low overhead and first-rate products.

“We generated more than $300 million in revenue last year; comparable jewelry-store chains generating that level of revenue would need hundreds of stores and thousands of employees,” she explained. “We don’t have stores, and we have fewer than 200 employees.”

Blue Nile operates on a 22% gross margin, compared to a typical bricks-and-mortar jewelry retailer’s margin of 50%-plus, according to Irvine. Its low overhead enables it to offer much lower prices than traditional jewelry stores.

“We have a very lean and efficient cost structure because of our model,” she said.

Blue Nile’s sales are dominated by engagement rings, which account for 70% of revenue. Diamond jewelry makes up another 20%; gold and platinum jewelry and watches account for the remaining 10%.

The company offers 60,000 independently certified diamonds. Through exclusive relationships with the world’s largest diamond manufacturers, it is able to display vast vendor inventories for sale. But because Blue Nile pays for a diamond only after a customer places an order, the company doesn’t have to hold large amounts of inventory.

But the success of the company is based on more than the sizable inventory and unique supplier relationships. Consumers buying diamonds want information, Irvine said, and Blue Nile provides plenty of it. The company’s Web site contains more than 200 pages of diamond information, including general gem education as well as specific product details.

The typical Blue Nile shopper is a 25-to 40-year-old male, who is likely a first-time diamond buyer. He feels intimidated visiting a bricks-and-mortar store, Irvine explained, because he doesn’t feel knowledgeable about the product category. Blue Nile, which takes the notion of romancing the stone very seriously, is his portal to enlightenment. For the more nervous buyers, the path to discovery isn’t just online.

“We operate a customer-service center here in our offices in Seattle, where we have consultants who are not commissioned-based and are advocates for the customer,” Irvine said. “Many of our customers call our consultative team for advice about choosing the perfect diamond.”

To critics who still feel the jewelry-buying experience must be done offline in order to assure quality and proper guidance, Irvine had this to say:

“Our business success has been built on inspiring trust and on repeat business; referrals are our No. 1 source of customers, more than any other individual marketing vehicle,” she explained. “That tells us that people are happy with the Blue Nile experience and feel comfortable with the Internet and buying online. We expect to see more and more adoption of this way of jewelry shopping.”

Not that it’s been all smooth sailing for Blue Nile, particularly given the state of the economy. Last August, in a conference call with analysts, company executives reported that their customers were trading down to less expensive jewelry. In the second quarter of 2008, Blue Nile recorded a profit of $3.2 million, down from $3.8 million a year ago.

“Of course, the economy has been very difficult this year,” Irvine acknowledged. “At a time like this, we have to manage our cost structure, but we can invest and further improve our customer offering. Offline, it’s more difficult.”

Indeed, as Irvine sees it, the physical store model with falling comp-store sales and high gross margins is far more challenging financially.

“In our case, we can be profitable, we can gain share, and I think we can come out stronger on the other side of this,” she added.

Blue Nile’s go-forward strategies include careful cost management, increased investment in the Web site, product offerings and marketing, and continued expansion into international markets. The company launched Canadian and U.K. Web sites about five years ago and earlier this year opened up to more than 25 new countries.

“We’ve seen tremendous results, and I really believe it’s based on that customer proposition of selection, great price, high quality and customization,” Irvine said. “That resonates with customers globally. So we will continue to invest in the international markets.”

But not at the expense of the individual customer.

“Our goal is literally to build the business one customer at a time,” Irvine said. “We’re off to a great start and we need to keep moving in the same direction.”